Each year, most of us file a federal income tax return and a Maryland income tax return. Some different rules and statutes determine how much money we owe to the Federal government and the Maryland government. The same is true concerning taxes that are owed after somebody dies. Some types of taxes are Maryland only or Federal only. And some types of taxes are owed to both the state of Maryland and at the Federal level.
Inheritance tax
Inheritance tax is a Maryland-only tax. This tax is applied where the Maryland-based decedent is making a gift and death to someone who is a friend, neighbor, or a family relative, such as a cousin or member of the extended family. It does not matter where the recipient of the gift lives. However, no inheritance tax is owed where the recipient is a parent, sibling, child, step-child, grandchild, or charity. If an inheritance is given to somebody outside of that group, a gift tax of approximately 10% must be paid before the gift is given. If inheritance tax is owed, it is only owed to the State of Maryland and not the Federal government.
Income tax
Income is often earned after a person dies, and in that case, income tax is owed by the recipient of the income. For example, a deceased person may have investments in the stock market, which distribute quarterly dividends. The dividends earned after death may be attributable to the deceased person’s estate. In this case, the estate must file an income tax return. However, for the most part, beneficiaries and heirs who receive gifts due to someone’s death pay little or no income tax on the inheritance they have received. If income tax is owed, it is often owed to both the Federal government and Maryland.
Estate tax
An estate tax is a concern for Maryland, where the decedent’s total assets are close to or greater than $5,000,000. An estate tax is not necessarily owed, but an estate tax return should be filed with the Comptroller of Maryland. If the estate tax is owed, the tax rate is as high as 16% on the amount owed and payable to the Comptroller of Maryland.
Federal Estate tax is also potentially owed when a decedent’s total assets are close to or greater than $12,060,000 if the person dies in 2022. If the estate tax is owed, the rate is high as 40% of the amount over $12,060,000 and payable to the United States Treasurer.
Conclusion
Overall, many different tax concerns must be considered when wrapping up the affairs of a loved one. Keep this in mind if you are appointed as the Personal Representative, and be sure to consult with a tax and estate expert so that you don’t inadvertently overlook paying taxes for which you may be responsible.